The bottom line for LCB

LCB employee Larry Smith stocking shelves in 2005 at the State Store at Franklin Mills, one of 613 that Pennsylvania operates. (JONATHAN WILSON / File Photograph)

A loss from dismantling the system could be recouped, report says.

By Tom Ferrick Jr., METROPOLIS

Posted: November 01, 2011

Although it generates tons of cash, the Pennsylvania Liquor Control Board system has a dirty little secret: It does not produce much in the way of profits.

Out of $1.5 billion in sales, the LCB ended with a net income of $52.5 million last year, according to a consultant's report released last week. The 285-page report, commissioned by Gov. Corbett, examines - sometimes in excruciating detail - the pros and cons of dismantling the system.

Not surprisingly, the report by the PFM Group comes out in favor of privatization, which syncs exactly with Corbett's view.

But the report makes a legitimate case that the loss of the profits currently generated by the state-owned and -operated system could be made up by charging annual license fees to the private wholesalers and retailers that would open up operations in Pennsylvania.

It also projects that the state could have a one-time windfall of $1.0 billion to $1.6 billion by limiting the number of licenses granted and auctioning them off to the highest bidders.

What would a privatized Pennsylvania look like? A lot like Delaware and New Jersey, with a mix of wine and liquor superstores, plus smaller retail shops and specialty purveyors.

There also would be more stores. The LCB runs 613 State Stores, which PFM says is among the lowest per capita numbers of liquor stores in the states it studied. A private system is likely to have 1,500 stores - or possibly more, depending on how aggressively the state markets licenses.

Would the wine and liquor these private stores sell be cheaper than today? If you read between the lines, the answer is: not much. Though private stores would have the freedom to vary markups and bargain-price items, prices will be high because of the level of state taxes on booze.

The state currently imposes the 6 percent sales tax on each bottle, plus the notorious 18 percent "emergency tax" enacted in 1936 after a devastating flood in Johnstown. These two taxes generate $377 million a year for the state. The state will not want to give up this revenue.

If the system is privatized, it would make sense if the state switched from these per-bottle taxes to a tax levied on gallons sold, according to PFM. (Such a gallonage tax would be easier to monitor and collect once the state no longer had complete control over sales and distribution.) PFM estimates that the state would have to levy a $8.31-a-gallon tax on liquor and a $5.84 gallonage tax on wine to maintain the $377 million it currently collects. These rates would be much higher than neighboring states', such as Delaware (where the tax on wine is 97 cents and liquor $5.46 on the gallon) and New Jersey (where tax on wine is 88 cents and liquor $5.50 on a gallon.) The state won't want to lose the profits generated by the LCB, either, but those numbers have declined in recent years, according to PFM, due to two factors: a slowing in the growth in wine and liquor sales, and higher expenses incurred by the LCB.

According to the consultants, over the last 10 years revenue has grown an average of 3.5 percent a year, while costs have gone up an average of 5.5 percent. PFM estimates this trend will continue.

As the report puts it: "It goes without saying that if the PLCB were a private sector firm, there would be concerns about its ability to remain as a viable business with expense growth outstripping revenue growth over a 10-year period."

One reason expenses are up is that the LCB is spending money trying to modernize its stores and operations. It has worked hard to shake its image as a Soviet-style shopping experience with a limited selection sold by clueless clerks. Even in smaller cities - Williamsport, for example - you can find great stores, with a wide selection of wine and knowledgeable clerks. To counter the move to privatization, the LCB has introduced a package of bills in the legislature to allow it to do more flexible pricing (as opposed the now-uniform 47 percent markup), to expand Sunday hours, to allow State Stores to sell lottery tickets, etc.

In other words, a government entity born in the post-Prohibition era to keep a tight control over liquor sales now wants to operate more like a big, private business to increase sales and profits.

In noting these efforts, the PFM report drily observes: "PLCB's desire to function more like a private sector organization raises the fundamental question: Why not simply privatize the system?"

Good question.

Former Inquirer columnist Tom Ferrick Jr. is senior editor of Metropolis, a local news and information website at www.phlmetropolis.com.